Britain Needs New Safeguards to Deal with Chinese Investment

China’s foreign direct investment is both necessary and welcome. However, it comes with risks, which current legal structures in Britain are ill-equipped to assess.

In April, the Confederation of British Industry (CBI) released a report noting the importance of revitalising the UK’s run-down regional infrastructure.

With Brexit approaching, the report stated that a ‘renewed focus’ was crucial for delivering growth to the UK, and could potentially add gains worth £12.7 billion to the wider economy by 2024.

The question is – as always – how to fund the next generation of the UK’s infrastructure. Fortunately, Europe is experiencing a surge in Chinese foreign direct investment (FDI), particularly into high-tech industries and critical national infrastructure (CNI).

Chinese FDI grew from €14 billion in 2015 to €20 billion in 2016, and stood at the end of last year at 44% higher than in 2014. Chinese investors have sunk more than £29 billion into the UK since 2005.

Furthermore, Chinese investment is increasingly led by its state-owned enterprises (accounting for more than 60% of the value of new investments), many of which are proficient in large capital-intensive projects, such as new infrastructure. Seems like a match made in heaven: Chinese money and British infrastructure.

However, as a recent study by the Henry Jackson Society argues, while Chinese investment into the UK should be welcomed, its financial backing of Britain’s digital and critical national infrastructure is not without risks.

Indeed, there is a trend in Europe, the US and, now, Australia of checking China’s investment surge. Security experts argue that such investments should be monitored and – on occasion – blocked from key parts of the British economy.

There are three reasons for this. First, it is down to China’s strategic intent behind investment, as found in its Made in China: 2025policy, whereby Beijing is encouraging its companies to ‘go global’. China now subsidises the acquisition of technology assets from foreign firms, while keeping those same firms from fairly accessing the Chinese market.

Second, it is due to changes inside China, such as increased Communist Party control over the state and society that blurs the distinction between state and private entrepreneurship even further.

Third, it is linked to attendant risks in Chinese ownership over British digital infrastructure, telecommunications and high-tech firms, and the UK’s energy infrastructure.

Given these points, it is time for the UK to establish a properly resourced investment review board, which, when national security is at risk, can block investment that threatens Britain’s national interests.

While the UK does have a number of mechanisms – such as the Competitions and Markets Authority (CMA) and the Communications-Electronics Security Group (CESG), now part of the National Cyber Security Centre – to ostensibly do this job, they are poorly resourced to analyse security deals, given the current investment surge.

As a 2013 Parliamentary Report discovered, British firms that own or run parts of the UK’s CNI are not required to inform or consult the government before they award a contract with a foreign firm, putting the onus on the government to monitor large numbers of potential deals at any given time.

This past year, Global Switch, the UK’s largest data cloud centre, sold a 49% stake to a Chinese consortium. Despite winning UK government approval for the deal, it was found that the consortium includes AVIC Trust, a subsidiary of AVIC – one of China’s largest defence industrial concerns.

The Australian Department of Defence, citing the deal, has been compelled to withdraw its data from the Australian part of Global Switch. Both this and the recent Chinese acquisition of a Canadian satellite communications company cleared by the Trudeau government, but cited by the Pentagon as problematic – demonstrate the need for a Five Eye-wide approach toward screening investment into digital infrastructure.

As Brexit looms, it hardly seems the time to impose limits on FDI into the British economy, but the UK cannot afford to damage the integrity of our critical national infrastructure nor the integrity of our alliance with the other Five Eye members.

Nor should we provide foreign firms with a completely open door to our start-ups dealing with Artificial Intelligence (AI). However, with a well-funded body, hosted inside a government ministry – perhaps the Department for Business, Energy & Industrial Strategy, the Treasury or some other similar department – the UK could minimise future risks.

It would make sense to require self-reporting by British companies in sensitive sectors, over a certain financial threshold, making the job of monitoring easier. It could work more closely with the Office for National Statistics to overhaul the monitoring of FDI into the UK’s critical sectors.

With such a broad range of technological, legal and commercial cross-overs, the unit could draw its personnel from a range of departments and security services. Ideally, it would be developed after government–private sector consultations, so that British companies can feed into the issue.

Formal timelines – like 30-day deadlines for a decision – would encourage foreign investors that the process was speedy and transparent.

The benefits of such a unit would be immediately apparent: for one, the government of the day would be provided with a buffer from foreign lobbying of the type that took place over Prime Minister Theresa May’s call for security checks on China’s involvement Hinkley Point C in September 2016.

Furthermore, foreign investors would be reassured that the process was not arbitrary or at the whim of politics. Finally, it would give locus for the UK to take part in an upgraded Five Eyes-level dialogue on investment into telecommunications, AI and critical national infrastructure of all five countries.

John Hemmings is Director of the Asia Studies Centre at the Henry Jackson Society.

Banner image: Former Prime Minister David Cameron shares a pint with Chinese President Xi Jinping at The Plough Inn at Cadsden in Princes Risborough, Buckinghamshire, as part of a British charm offensive to attract Chinese investment. It seems to have worked. Sales of Greene King IPA, which the two were drinking, have reportedly soared in China. Courtesy of PA Images.

The views expressed in this Commentary are those of the author, and do not reflect the views of RUSI or any other institution.

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